Recent political
debate in the United States and other advanced capitalist democracies has been
dominated by two issues: the rise of economic inequality and the scale of government
intervention to address it. As the 2012 U.S. presidential election and the battles
over the "fiscal cliff" have demonstrated, the central focus of the
left today is on increasing government taxing and spending, primarily to
reverse the growing stratification of society, whereas the central focus of the
right is on decreasing taxing and spending, primarily to ensure economic
dynamism. Each side minimizes the concerns of the other, and each seems to
believe that its desired policies are sufficient to ensure prosperity and
social stability. Both are wrong.

Inequality is indeed increasing
almost everywhere in the postindustrial capitalist world. But despite what many
on the left think, this is not the result of politics, nor is politics likely
to reverse it, for the problem is more deeply rooted and intractable than
generally recognized. Inequality is an inevitable product of capitalist
activity, and expanding equality of opportunity only increases it -- because
some individuals and communities are simply better able than others to exploit
the opportunities for development and advancement that capitalism affords.
Despite what many on the right think, however, this is a problem for everybody,
not just those who are doing poorly or those who are ideologically committed to
egalitarianism -- because if left unaddressed, rising inequality and economic
insecurity can erode social order and generate a populist backlash against the
capitalist system at large.

Over the last few centuries, the
spread of capitalism has generated a phenomenal leap in human progress, leading
to both previously unimaginable increases in material living standards and the
unprecedented cultivation of all kinds of human potential. Capitalism's
intrinsic dynamism, however, produces insecurity along with benefits, and so
its advance has always met resistance. Much of the political and institutional
history of capitalist societies, in fact, has been the record of attempts to
ease or cushion that insecurity, and it was only the creation of the modern
welfare state in the middle of the twentieth century that finally enabled
capitalism and democracy to coexist in relative harmony.

It was the creation of the modern welfare state that finally
enabled capitalism and democracy to coexist in relative harmony.

In recent decades, developments in
technology, finance, and international trade have generated new waves and forms
of insecurity for leading capitalist economies, making life increasingly
unequal and chancier for not only the lower and working classes but much of the
middle class as well. The right has largely ignored the problem, while the left
has sought to eliminate it through government action, regardless of the costs.
Neither approach is viable in the long run. Contemporary capitalist polities
need to accept that inequality and insecurity will continue to be the
inevitable result of market operations and find ways to shield citizens from
their consequences -- while somehow still preserving the dynamism that produces
capitalism's vast economic and cultural benefits in the first place.

COMMODIFICATION AND CULTIVATION

Capitalism is a system of economic
and social relations marked by private property, the exchange of goods and
services by free individuals, and the use of market mechanisms to control the
production and distribution of those goods and services. Some of its elements
have existed in human societies for ages, but it was only in the seventeenth
and eighteenth centuries, in parts of Europe and its offshoots in North America, that they all came together in force. Throughout
history, most households had consumed most of the things that they produced and
produced most of what they consumed. Only at this point did a majority of the
population in some countries begin to buy most of the things they consumed and
do so with the proceeds gained from selling most of what they produced.

The growth of market-oriented
households and what came to be called "commercial society" had
profound implications for practically every aspect of human activity. Prior to
capitalism, life was governed by traditional institutions
that subordinated the choices and destinies of individuals to various communal,
political, and religious structures. These
institutions kept change to a minimum, blocking people from making much
progress but also protecting them from many of life's vicissitudes. The
advent of capitalism gave individuals more control over and responsibility for
their own lives than ever before -- which proved both liberating and
terrifying, allowing for both progress and regression.

Commodification -- the
transformation of activities performed for private use into activities
performed for sale on the open market -- allowed people to use their time more
efficiently, specializing in producing what they were relatively good at and
buying other things from other people. New forms of commerce and manufacturing
used the division of labor to produce common household items cheaply and also
made a range of new goods available. The result, as the historian Jan de Vries has noted, was what contemporaries called "an
awakening of the appetites of the mind" -- an expansion of subjective
wants and a new subjective perception of needs. This ongoing expansion of wants
has been chastised by critics of capitalism from Rousseau to Marcuse as imprisoning
humans in a cage of unnatural desires. But it has also been praised by
defenders of the market from Voltaire onward for broadening the range of human
possibility. Developing and fulfilling higher wants and needs, in this view, is
the essence of civilization.

Because we tend to think of
commodities as tangible physical objects, we often overlook the extent to which
the creation and increasingly cheap distribution of new cultural commodities
have expanded what one might call the means of self-cultivation. For the
history of capitalism is also the history of the extension of communication,
information, and entertainment -- things to think with, and about.

Among the earliest modern
commodities were printed books (in the first instance, typically the Bible),
and their shrinking price and increased availability were far more historically
momentous than, say, the spread of the internal combustion engine. So, too,
with the spread of newsprint, which made possible the newspaper and the
magazine. Those gave rise, in turn, to new markets for information and to the
business of gathering and distributing news. In the eighteenth century, it took
months for news from India to reach London; today, it takes moments. Books and
news have made possible an expansion of not only our awareness but also our
imagination, our ability to empathize with others and imagine living in new
ways ourselves. Capitalism and commodification have thus facilitated both
humanitarianism and new forms of self-invention.

Over the last century, the means of
cultivation were expanded by the invention of recorded sound, film, and
television, and with the rise of the Internet and home computing, the costs of
acquiring knowledge and culture have fallen dramatically. For
those so inclined, the expansion of the means of cultivation makes possible an
almost unimaginable enlargement of one's range of knowledge.

FAMILY MATTERS

If capitalism has opened up ever
more opportunities for the development of human potential, however, not
everyone has been able to take full advantage of those opportunities or
progress far once they have done so. Formal or informal barriers to equality of
opportunity, for example, have historically blocked various sectors of the
population -- such as women, minorities, and the poor -- from benefiting fully
from all capitalism offers. But over time, in the advanced capitalist world,
those barriers have gradually been lowered or removed, so that now opportunity
is more equally available than ever before. The inequality that exists today,
therefore, derives less from the unequal availability of opportunity than it
does from the unequal ability to exploit opportunity. And that unequal ability,
in turn, stems from differences in the inherent human potential that
individuals begin with and in the ways that families and communities enable and
encourage that human potential to flourish.

Not everyone has been able to take full advantage of the new
opportunities for the development of human potential.

The role of the family in shaping
individuals' ability and inclination to make use of the means of cultivation
that capitalism offers is hard to overstate. The household is not only a site
of consumption and of biological reproduction. It is also the main setting in
which children are socialized, civilized, and educated, in which habits are
developed that influence their subsequent fates as people and as market actors.
To use the language of contemporary economics, the family is a workshop in
which human capital is produced.

Over time, the family has shaped
capitalism by creating new demands for new commodities. It has also been
repeatedly reshaped by capitalism because new commodities and new means of
production have led family members to spend their time in new ways. As new
consumer goods became available at ever-cheaper prices during the eighteenth
century, families devoted more of their time to market-oriented activities,
with positive effects on their ability to consume. Male wages may have actually
declined at first, but the combined wages of husbands, wives, and children made
higher standards of consumption possible. Economic growth and expanding
cultural horizons did not improve all aspects of life for everybody, however.
The fact that working-class children could earn money from an early age created
incentives to neglect their education, and the unhealthiness of some of the
newly available commodities (white bread, sugar, tobacco, distilled spirits)
meant that rising standards of consumption did not always mean an improvement
in health and longevity. And as female labor time was reallocated from the
household to the market, standards of cleanliness appear to have declined,
increasing the chance of disease.

The late eighteenth and early
nineteenth centuries saw the gradual spread of new means of production across
the economy. This was the age of the machine, characterized by the increasing
substitution of inorganic sources of power (above all the steam engine) for
organic sources of power (human and animal), a process that increased
productivity tremendously. As opposed to in a society based largely on
agriculture and cottage industries, manufacturing now increasingly took place
in the factory, built around new engines that were too large, too loud, and too
dirty to have a place in the home. Work was therefore more and more divorced
from the household, which ultimately changed the structure of the family.

At first, the owners of the new,
industrialized factories sought out women and children as employees, since they
were more tractable and more easily disciplined than men. But by the second
half of the nineteenth century, the average British workingman was enjoying
substantial and sustained growth in real wages, and a new division of labor
came about within the family itself, along lines of gender. Men, whose relative
strength gave them an advantage in manufacturing, increasingly worked in
factories for market wages, which were high enough to support a family. The
nineteenth-century market, however, could not provide commodities that produced
goods such as cleanliness, hygiene, nutritious meals, and the mindful supervision of children. Among the upper classes, these services could be provided by servants. But for most
families, such services were increasingly provided by wives.
This caused the rise of the breadwinner-homemaker family, with a division of
labor along gender lines. Many of the improvements in health, longevity, and
education from the mid-nineteenth to the mid-twentieth century, de Vries has argued, can be explained by this reallocation of female
labor from the market to the household and, eventually, the reallocation of
childhood from the market to education, as children left the work force for
school.

DYNAMISM AND INSECURITY

For most of history, the prime
source of human insecurity was nature. In such societies, as Marx noted, the
economic system was oriented toward stability -- and stagnancy. Capitalist
societies, by contrast, have been oriented toward innovation and dynamism, to
the creation of new knowledge, new products, and new modes of production and
distribution. All of this has shifted the locus of insecurity from nature to
the economy.

Hegel observed in the 1820s that for
men in a commercial society based on the breadwinner-homemaker model, one's
sense of self-worth and recognition by others was tied to having a job. This
posed a problem, because in a dynamic capitalist market, unemployment was a
distinct possibility. The division of labor created by the market meant that
many workers had skills that were highly specialized and suited for only a
narrow range of jobs. The market created shifting wants, and increased demand
for new products meant decreased demand for older ones. Men whose lives had
been devoted to their role in the production of the old products were left
without a job and without the training that would allow them to find new work.
And the mechanization of production also led to a loss of jobs. From its very
beginnings, in other words, the creativity and innovation of industrial
capitalism were shadowed by insecurity for members of the work force.

Marx and Engels sketched out
capitalism's dynamism, insecurity, refinement of needs, and expansion of
cultural possibilities in The Communist Manifesto:

The bourgeoisie has, through its
exploitation of the world market, given a cosmopolitan character to production
and consumption in every country. To the great chagrin of reactionaries, it has
drawn from under the feet of industry the national ground on which it stood.
All old-established national industries have been destroyed or are daily being
destroyed. They are dislodged by new industries, whose introduction becomes a
life and death question for all civilized nations, by industries that no longer
work up indigenous raw material, but raw material drawn from the remotest zones;
industries whose products are consumed, not only at home, but in every quarter
of the globe. In place of the old wants, satisfied by the production of the
country, we find new wants, requiring for their satisfaction the products of
distant lands and climes. In place of the old local and national seclusion and
self-sufficiency, we have intercourse in every direction, universal
inter-dependence of nations.

Inequality and insecurity are perennial features of
capitalism.

In the twentieth century, the
economist Joseph Schumpeter would expand on these points with his notion that
capitalism was characterized by "creative destruction," in which new
products and forms of distribution and organization displaced older forms.
Unlike Marx, however, who saw the source of this dynamism in the disembodied
quest of "capital" to increase (at the expense, he thought, of the
working class), Schumpeter focused on the role of the entrepreneur, an
innovator who introduced new commodities and discovered new markets and
methods.

The dynamism and insecurity created
by nineteenth-century industrial capitalism led to the creation of new
institutions for the reduction of insecurity, including the limited liability
corporation, to reduce investor risks; labor unions, to further worker interests;
mutual-aid societies, to provide loans and burial insurance; and commercial
life insurance. In the middle decades of the twentieth century, in response to
the mass unemployment and deprivation produced by the Great Depression (and the
political success of communism and fascism, which convinced many democrats that
too much insecurity was a threat to capitalist democracy itself), Western
democracies embraced the welfare state. Different nations created different
combinations of specific programs, but the new welfare states had a good deal
in common, including old-age and unemployment insurance and various measures to
support families.

The expansion of the welfare state
in the decades after World War II took place at a time when the capitalist
economies of the West were growing rapidly. The success of the industrial
economy made it possible to siphon off profits and wages to government purposes
through taxation. The demographics of the postwar era, in which the
breadwinner-homemaker model of the family predominated, helped also, as
moderately high birthrates created a favorable ratio of active workers to
dependents. Educational opportunities expanded, as elite universities
increasingly admitted students on the basis of their academic achievements and
potential, and more and more people attended institutions of higher education.
And barriers to full participation in society for women and minorities began to
fall as well. The result of all of this was a temporary equilibrium during
which the advanced capitalist countries experienced strong economic growth,
high employment, and relative socioeconomic equality.

LIFE IN THE POSTINDUSTRIAL ECONOMY

For humanity in general, the late
twentieth and early twenty-first centuries have been a period of remarkable
progress, due in no small part to the spread of capitalism around the globe.
Economic liberalization in China, India, Brazil, Indonesia, and other countries
in the developing world has allowed hundreds of millions of people to escape
grinding poverty and move into the middle class. Consumers in more advanced
capitalist countries, such as the United States, meanwhile, have experienced a
radical reduction in the price of many commodities, from clothes to
televisions, and the availability of a river of new goods that have transformed
their lives.

Most remarkable, perhaps, have been
changes to the means of self-cultivation. As the economist Tyler Cowen notes,
much of the fruit of recent developments "is in our minds and in our laptops and not so much in
the revenue-generating sector of the economy." As a result, "much of
the value of the internet is experienced at the
personal level and so will never show up in the productivity numbers."
Many of the great musical performances of the twentieth century, in every
genre, are available on YouTube for free. Many of the great films of the
twentieth century, once confined to occasional showings at art houses in a few
metropolitan areas, can be viewed by anybody at any time for a small monthly
charge. Soon, the great university libraries will be available online to the
entire world, and other unprecedented opportunities for personal development
will follow.

All this progress,
however, has been shadowed by capitalism's perennial features of inequality and
insecurity. In
1973, the sociologist Daniel Bell noted that in the advanced capitalist world,
knowledge, science, and technology were driving a transformation to what he
termed "postindustrial society." Just as manufacturing had previously
displaced agriculture as the major source of employment, he argued, so the
service sector was now displacing manufacturing. In a postindustrial,
knowledge-based economy, the production of manufactured goods depended more on
technological inputs than on the skills of the workers who actually built and
assembled the products. That meant a relative decline in the need for and
economic value of skilled and semiskilled factory workers -- just as there had
previously been a decline in the need for and value of agricultural laborers.
In such an economy, the skills in demand included scientific and technical
knowledge and the ability to work with information. The revolution in
information technology that has swept through the economy in recent decades, meanwhile,
has only exacerbated these trends.

One crucial impact of the rise of
the postindustrial economy has been on the status and roles of men and women.
Men's relative advantage in the preindustrial and industrial economies rested
in large part on their greater physical strength -- something now ever less in
demand. Women, in contrast, whether by biological disposition or socialization,
have had a relative advantage in human skills and emotional intelligence, which
have become increasingly more important in an economy more oriented to human
services than to the production of material objects. The portion of the economy
in which women could participate has expanded, and their labor has become more
valuable -- meaning that time spent at home now comes at the expense of more
lucrative possibilities in the paid work force.

This has led to the growing
replacement of male breadwinner-female homemaker households by dual-income
households. Both advocates and critics of the move of women into the paid
economy have tended to overemphasize the role played in this shift by the
ideological struggles of feminism, while underrating the role played by changes
in the nature of capitalist production. The redeployment of female labor from
the household has been made possible in part by the existence of new
commodities that cut down on necessary household labor time (such as washing
machines, dryers, dishwashers, water heaters, vacuum cleaners, microwave
ovens). The greater time devoted to market activity, in turn, has given rise to
new demand for household-oriented consumer goods that require less labor (such
as packaged and prepared food) and the expansion of restaurant and fast-food
eating. And it has led to the commodification of care, as the young, the
elderly, and the infirm are increasingly looked after not by relatives but by
paid minders.

The trend for women to receive more
education and greater professional attainments has been accompanied by changing
social norms in the choice of marriage partners. In the age of the breadwinner-homemaker
marriage, women tended to place a premium on earning capacity in their choice
of partners. Men, in turn, valued the homemaking capacities of potential
spouses more than their vocational attainments. It was not unusual for men and
women to marry partners of roughly the same intelligence, but women tended to
marry men of higher levels of education and economic achievement. As the
economy has passed from an industrial economy to a postindustrial
service-and-information economy, women have joined men in attaining recognition
through paid work, and the industrious couple today is more likely to be made
of peers, with more equal levels of education and more comparable levels of
economic achievement -- a process termed "assortative
mating."

Globalization has reinforced this pattern of increasingly
unequal returns to human capital.

INEQUALITY ON THE RISE

These postindustrial social trends
have had a significant impact on inequality. If family income doubles at each
step of the economic ladder, then the total incomes of those families higher up
the ladder are bound to increase faster than the total incomes of those further
down. But for a substantial portion of households at the lower end of the
ladder, there has been no doubling at all -- for as the relative pay of women
has grown and the relative pay of less-educated, working-class men has
declined, the latter have been viewed as less and less marriageable. Often, the
limitations of human capital that make such men less employable also make them
less desirable as companions, and the character traits of men who are
chronically unemployed sometimes deteriorate as well. With less to bring to the
table, such men are regarded as less necessary -- in part because women can now
count on provisions from the welfare state as an additional independent source
of income, however meager.

In the United States, among the most
striking developments of recent decades has been the stratification of marriage
patterns among the various classes and ethnic groups of society. When divorce
laws were loosened in the 1960s, there was a rise in divorce rates among all
classes. But by the 1980s, a new pattern had emerged: divorce declined among
the more educated portions of the populace, while rates among the less-educated
portions continued to rise. In addition, the more educated and more well-to-do were more likely to wed, while the less educated
were less likely to do so. Given the family's role as an incubator of human
capital, such trends have had important spillover effects on inequality.
Abundant research shows that children raised by two parents in an ongoing union
are more likely to develop the self-discipline and self-confidence that make
for success in life, whereas children -- and particularly boys -- reared in single-parent
households (or, worse, households with a mother who has a series of temporary
relationships) have a greater risk of adverse outcomes.

All of this has been taking place
during a period of growing equality of access to education and increasing stratification
of marketplace rewards, both of which have increased the importance of human
capital. One element of human capital is cognitive ability: quickness of mind,
the ability to infer and apply patterns drawn from experience, and the ability
to deal with mental complexity. Another is character and social skills:
self-discipline, persistence, responsibility. And a
third is actual knowledge. All of these are becoming increasingly crucial for
success in the postindustrial marketplace. As the economist Brink Lindsey notes
in his recent book Human Capitalism, between 1973 and 2001, average
annual growth in real income was only 0.3 percent for people in the bottom
fifth of the U.S. income distribution, compared with 0.8 percent for people in
the middle fifth and 1.8 percent for those in the top fifth. Somewhat similar
patterns also prevail in many other advanced economies.

Globalization has not caused this
pattern of increasingly unequal returns to human capital but reinforced it. The
economist Michael Spence has distinguished between "tradable" goods
and services, which can be easily imported and exported, and "untradable" ones, which cannot. Increasingly, tradable
goods and services are imported to advanced capitalist societies from less
advanced capitalist societies, where labor costs are lower. As manufactured
goods and routine services are outsourced, the wages of the relatively
unskilled and uneducated in advanced capitalist societies decline further,
unless these people are somehow able to find remunerative employment in the untradable sector.

THE IMPACT OF MODERN FINANCE

Rising inequality, meanwhile, has
been compounded by rising insecurity and anxiety for people higher up on the
economic ladder. One trend contributing to this problem has been the financialization of the economy, above all in the United
States, creating what was characterized as "money
manager capitalism" by the economist Hyman Minsky
and has been called "agency capitalism" by the financial expert
Alfred Rappaport.

As late as the 1980s, finance was an
essential but limited element of the U.S. economy. The trade in equities (the
stock market) was made up of individual investors, large or small, putting
their own money in stocks of companies they believed to have good long-term
prospects. Investment capital was also available from the major Wall Street
investment banks and their foreign counterparts, which were private
partnerships in which the partners' own money was on the line. All of this
began to change as larger pools of capital became available for investment and
came to be deployed by professional money managers rather the owners of the
capital themselves.

One source of such new capital was
pension funds. In the postwar decades, when major American industries emerged
from World War II as oligopolies with limited competition and large, expanding
markets at home and abroad, their profits and future prospects allowed them to
offer employees defined-benefit pension plans, with the risks involved assumed
by the companies themselves. From the 1970s on, however, as the U.S. economy
became more competitive, corporate profits became more uncertain, and companies
(as well as various public-sector organizations) attempted to shift the risk by
putting their pension funds into the hands of professional money managers, who
were expected to generate significant profits. Retirement income for employees
now depended not on the profits of their employers but on the fate of their
pension funds.

Another source of new capital was
university and other nonprofit organizations' endowments, which grew initially
thanks to donations but were increasingly expected to grow further based on
their investment performance. And still another source of new capital came from
individuals and governments in the developing world, where rapid economic
growth, combined with a high propensity to save and a desire for relatively
secure investment prospects, led to large flows of money into the U.S.
financial system.

Spurred in part by these new
opportunities, the traditional Wall Street investment banks transformed
themselves into publicly traded corporations -- that is to say, they, too,
began to invest not just with their own funds but also with other people's
money -- and tied the bonuses of their partners and employees to annual profits.
All of this created a highly competitive financial system dominated by
investment managers working with large pools of capital, paid based on their
supposed ability to outperform their peers. The structure of incentives in this
environment led fund managers to try to maximize short-term returns, and this
pressure trickled down to corporate executives. The shrunken time horizon
created a temptation to boost immediate profits at the expense of longer-term
investments, whether in research and development or in improving the skills of
the company's work force. For both managers and employees, the result has been
a constant churning that increases the likelihood of job losses and economic
insecurity.

An advanced capitalist economy does
indeed require an extensive financial sector. Part of this is a simple
extension of the division of labor: outsourcing decisions about investing to
professionals allows the rest of the population the mental space to pursue
things they do better or care more about. The increasing complexity of
capitalist economies means that entrepreneurs and corporate executives need
help in deciding when and how to raise funds. And private equity firms that
have an ownership interest in growing the real value of the firms in which they
invest play a key role in fostering economic growth. These matters, which
properly occupy financiers, have important consequences, and handling them
requires intelligence, diligence, and drive, so it is neither surprising nor
undesirable that specialists in this area are highly paid. But whatever its
benefits and continued social value, the financialization
of society has nevertheless had some unfortunate consequences, both in
increasing inequality by raising the top of the economic ladder (thanks to the
extraordinary rewards financial managers receive) and in increasing insecurity
among those lower down (thanks to the intense focus on short-term economic
performance to the exclusion of other concerns).

THE FAMILY AND HUMAN CAPITAL

In today's globalized, financialized, postindustrial environment, human capital is
more important than ever in determining life chances. This makes families more
important, too, because as each generation of social science researchers
discovers anew (and much to their chagrin), the resources transmitted by the
family tend to be highly determinative of success in school and in the
workplace. As the economist Friedrich Hayek pointed out half a century ago in The
Constitution of Liberty, the main impediment to true equality of
opportunity is that there is no substitute for intelligent parents or for an
emotionally and culturally nurturing family. In the words of a recent study by
the economists Pedro Carneiro and James Heckman,
"Differences in levels of cognitive and noncognitive
skills by family income and family background emerge early and persist. If
anything, schooling widens these early differences."

Hereditary endowments come in a
variety of forms: genetics, prenatal and postnatal nurture, and the cultural
orientations conveyed within the family. Money matters, too, of course, but is
often less significant than these largely nonmonetary factors. (The prevalence
of books in a household is a better predictor of higher test scores than family
income.) Over time, to the extent that societies are organized along
meritocratic lines, family endowments and market rewards will tend to converge.

Educated parents tend to invest more
time and energy in child care, even when both parents
are engaged in the work force. And families strong in human capital are more
likely to make fruitful use of the improved means of cultivation that
contemporary capitalism offers (such as the potential for online enrichment)
while resisting their potential snares (such as unrestricted viewing of
television and playing of computer games).

This affects the ability of children
to make use of formal education, which is increasingly, at least potentially,
available to all regardless of economic or ethnic status. At the turn of the
twentieth century, only 6.4 percent of American teenagers graduated from high
school, and only one in 400 went on to college. There was thus a huge portion
of the population with the capacity, but not the opportunity, for greater
educational achievement. Today, the U.S. high school graduation rate is about
75 percent (down from a peak of about 80 percent in 1960), and roughly 40
percent of young adults are enrolled in college.

The Economist recently repeated a shibboleth:
"In a society with broad equality of opportunity, the parents' position on
the income ladder should have little impact on that of their children."
The fact is, however, that the greater equality of institutional opportunity
there is, the more families' human capital endowments matter. As the political
scientist Edward Banfield noted a generation ago in The
Unheavenly City Revisited, "All education
favors the middle- and upper-class child, because to be middle- or upper-class
is to have qualities that make one particularly educable." Improvements in
the quality of schools may improve overall educational outcomes, but they tend
to increase, rather than diminish, the gap in achievement between children from
families with different levels of human capital. Recent investigations that
purport to demonstrate less intergenerational mobility in the United States
today than in the past (or than in some European nations) fail to note that
this may in fact be a perverse product of generations of increasing equality of
opportunity. And in this respect, it is possible that the United States may
simply be on the leading edge of trends found in other advanced capitalist
societies as well.

DIFFERENTIAL GROUP ACHIEVEMENT

The family is not the only social
institution to have a major impact on the development of human capital and
eventual success in the marketplace; so do communal groupings, such as those of
religion, race, and ethnicity. In his 1905 book, The Protestant Ethic and
the Spirit of Capitalism, the sociologist Max Weber observed that in
religiously diverse areas, Protestants tended to do better economically than
Catholics, and Calvinists better than Lutherans. Weber presented a cultural
explanation for this difference, grounded in the different psychological
propensities created by the different faiths. A few years later, in The Jews
and Modern Capitalism, Weber's contemporary Werner Sombart
offered an alternative explanation for differential group success, based partly
on cultural propensities and partly on racial ones. And in 1927, their younger
colleague Schumpeter titled a major essay "Social Classes in an Ethnically
Homogeneous Environment" because he took it for granted that in an
ethnically mixed setting, levels of achievement would vary by ethnicity, not
just class.

The explanations offered for such
patterns are less important than the fact that differential group performance
has been a perennial feature in the history of capitalism, and such differences
continue to exist today. In the contemporary United States, for example, Asians
(especially when disaggregated from Pacific Islanders) tend to outperform
non-Hispanic whites, who in turn tend to outperform
Hispanics, who in turn tend to outperform African Americans. This is true
whether one looks at educational achievement, earnings, or family patterns,
such as the incidence of nonmarital births.

Those western European nations (and
especially northern European nations) with much higher levels of equality than
the United States tend to have more ethnically homogeneous populations. As
recent waves of immigration have made many advanced post­industrial
societies less ethnically homogeneous, they also seem to be increasingly
stratifying along communal lines, with some immigrant groups exhibiting more
favorable patterns than the preexisting population and other groups doing
worse. In the United Kingdom, for example, the children of Chinese and Indian
immigrants tend do better than the indigenous population, whereas those of
Caribbean blacks and Pakistanis tend to do worse. In France, the descendants of
Vietnamese tend to do better, and those of North African origin tend to do
worse. In Israel, the children of Russian immigrants tend to do better, while
those of immigrants from Ethiopia tend to do worse. In Canada, the children of
Chinese and Indians tend to do better, while those of Caribbean and Latin American
origin tend to do worse. Much of this divergence in
achievement can be explained by the differing class and educational backgrounds
of the immigrant groups in their countries of origin. But because the
communities themselves act as carriers and incubators of human capital, the
patterns can and do persist over time and place.

In the case of the United States,
immigration plays an even larger role in exacerbating inequality, for the
country's economic dynamism, cultural openness, and geographic position tend to
attract both some of world's best and brightest and some of its least educated.
This raises the top and lowers the bottom of the economic ladder.

WHY EDUCATION IS NOT A PANACEA

A growing recognition of the
increasing economic inequality and social stratification in postindustrial
societies has naturally led to discussions of what can be done about it, and in
the American context, the answer from almost all quarters is simple: education.

One strand of this logic focuses on
college. There is a growing gap in life chances between those who complete
college and those who don't, the argument runs, and so as many people as
possible should go to college. Unfortunately, even though a higher percentage
of Americans are attending college, they are not necessarily learning more. An
increasing number are unqualified for college-level work, many leave without
completing their degrees, and others receive degrees reflecting standards much
lower than what a college degree has usually been understood to mean.

The most significant divergence in
educational achievement occurs before the level of college, meanwhile, in rates
of completion of high school, and major differences in performance (by class
and ethnicity) appear still earlier, in elementary school. So a second strand
of the education argument focuses on primary and secondary schooling. The
remedies suggested here include providing schools with more money, offering
parents more choice, testing students more often, and improving teacher
performance. Even if some or all of these measures might be desirable for other
reasons, none has been shown to significantly diminish the gaps between
students and between social groups -- because formal schooling itself plays a
relatively minor role in creating or perpetuating achievement gaps.

The gaps turn out to have their
origins in the different levels of human capital children possess when they
enter school -- which has led to a third strand of the education argument,
focusing on earlier and more intensive childhood intervention. Suggestions here
often amount to taking children out of their family environments and putting
them into institutional settings for as much time as possible (Head Start,
Early Head Start) or even trying to resocialize whole
neighborhoods (as in the Harlem Children's Zone project). There are examples of
isolated successes with such programs, but it is far from clear that these are
reproducible on a larger scale. Many programs show short-term gains in
cognitive ability, but most of these gains tend to fade out over time, and
those that remain tend to be marginal. It is more plausible that such programs
improve the noncognitive skills and character traits
conducive to economic success -- but at a significant cost and investment,
employing resources extracted from the more successful parts of the population
(thus lowering the resources available to them) or diverted from other
potential uses.

For all these reasons, inequality in
advanced capitalist societies seems to be both growing and ineluctable, at least
for the time being. Indeed, one of the most robust findings of contemporary
social scientific inquiry is that as the gap between high-income and low-income
families has increased, the educational and employment achievement gaps between
the children of these families has increased even more.

WHAT IS TO BE DONE?

Capitalism today continues to
produce remarkable benefits and continually greater opportunities for
self-cultivation and personal development. Now as ever, however, those upsides
are coming with downsides, particularly increasing inequality and insecurity.
As Marx and Engels accurately noted, what distinguishes capitalism from other
social and economic systems is its "constant revolutionizing of
production, uninterrupted disturbance of all social conditions, [and]
everlasting uncertainty and agitation."

At the end of the eighteenth
century, the greatest American student and practitioner of political economy,
Alexander Hamilton, had some profound observations about the inevitable
ambiguity of public policy in a world of creative destruction:

Tis the portion of man assigned to
him by the eternal allotment of Providence that every good he enjoys, shall be
alloyed with ills, that every source of his bliss shall be a source of his
affliction -- except Virtue alone, the only unmixed good which is permitted to
his temporal Condition. . . . The true politician . .
. will favor all those institutions and plans which tend to make men happy
according to their natural bent which multiply the sources of individual
enjoyment and increase those of national resource and strength -- taking care
to infuse in each case all the ingredients which can be devised as preventives
or correctives of the evil which is the eternal concomitant of temporal
blessing.

Now as then, the question at hand is
just how to maintain the temporal blessings of capitalism while devising
preventives and correctives for the evils that are their eternal concomitant.

One potential cure for the problems
of rising inequality and insecurity is simply to redistribute income from the
top of the economy to the bottom. This has two drawbacks, however. The first is
that over time, the very forces that lead to greater inequality reassert
themselves, requiring still more, or more aggressive, redistribution. The
second is that at some point, redistribution produces substantial resentment
and impedes the drivers of economic growth. Some degree of postmarket
redistribution through taxation is both possible and
necessary, but just how much is ideal will inevitably be contested, and however
much it is, it will never solve the underlying problems.

A second cure, using government
policy to close the gaps between individuals and groups by offering
preferential treatment to underperformers, may be worse than the disease.
Whatever their purported benefits, mandated rewards to
certain categories of citizens inevitably create a sense of injustice among the
rest of the population. More grave is their cost in
terms of economic efficiency, since by definition, they promote less-qualified
individuals to positions they would not attain on the basis of merit alone.
Similarly, policies banning the use of meritocratic criteria in education,
hiring, and credit simply because they have a "differential impact"
on the fortunes of various communal groups or because they contribute to
unequal social outcomes will inevitably impede the quality of the educational
system, the work force, and the economy.

A third possible cure, encouraging
continued economic innovation that will benefit everybody, is more promising.
The combination of the Internet and computational revolutions may prove
comparable to the coming of electricity, which facilitated an almost
unimaginable range of other activities that transformed society at large in
unpredictable ways. Among other gains, the Internet has radically increased the
velocity of knowledge, a key factor in capitalist economic growth since at
least the eighteenth century. Add to that the prospects of other fields still
in their infancy, such as biotechnology, bioinformatics, and nanotechnology,
and the prospects for future economic growth and the ongoing improvement of
human life look reasonably bright. Nevertheless, even continued innovation and
revived economic growth will not eliminate or even significantly reduce
socioeconomic inequality and insecurity, because individual, family, and group
differences will still affect the development of human capital and professional
accomplishment.

For capitalism to continue to be
made legitimate and palatable to populations at large, therefore -- including
those on the lower and middle rungs of the socioeconomic ladder, as well as
those near the top, losers as well as winners -- government safety nets that
help diminish insecurity, alleviate the sting of failure in the marketplace,
and help maintain equality of opportunity will have to be maintained and
revitalized. Such programs already exist in most of the advanced capitalist
world, including the United States, and the right needs to accept that they
serve an indispensable purpose and must be preserved rather than gutted -- that
major government social welfare spending is a proper response to some
inherently problematic features of capitalism, not a "beast" that
should be "starved."

In the United States, for example, measures
such as Social Security, unemployment insurance, food stamps, the Earned Income
Tax Credit, Medicare, Medicaid, and the additional coverage provided by the
Affordable Care Act offer aid and comfort above all to those less successful in
and more buffeted by today's economy. It is unrealistic to imagine that the
popular demand for such programs will diminish. It is uncaring to cut back the
scope of such programs when inequality and insecurity have risen.
And if nothing else, the enlightened self-interest of those who profit most
from living in a society of capitalist dynamism should lead them to recognize
that it is imprudent to resist parting with some of their market gains in order
to achieve continued social and economic stability. Government entitlement
programs need structural reform, but the right should accept that a reasonably
generous welfare state is here to stay, and for eminently sensible reasons.

The left, in turn, needs to come to
grips with the fact that aggressive attempts to eliminate inequality may be
both too expensive and futile. The very success of past attempts to increase
equality of opportunity -- such as by expanding access to education and
outlawing various forms of discrimination -- means that in advanced capitalist
societies today, large, discrete pools of untapped human potential are
increasingly rare. Additional measures to promote equality are therefore likely
to produce fewer gains than their predecessors, at greater cost. And insofar as
such measures involve diverting resources from those with more human capital to
those with less, or bypassing criteria of achievement and merit, they may
impede the economic dynamism and growth on which the existing welfare state
depends.

The challenge for government policy
in the advanced capitalist world is thus how to maintain a rate of economic
dynamism that will provide increasing benefits for all while still managing to
pay for the social welfare programs required to make citizens' lives bearable
under conditions of increasing inequality and insecurity. Different countries
will approach this challenge in different ways, since their priorities,
traditions, size, and demographic and economic characteristics vary. (It is
among the illusions of the age that when it comes to government policy, nations
can borrow at will from one another.) But a useful starting point might be the
rejection of both the politics of privilege and the politics of resentment and
the adoption of a clear-eyed view of what capitalism actually involves, as
opposed to the idealization of its worshipers and the demonization of its
critics.